8 States That Will Make Millions Taxing Marijuana

Legislation to regulate and tax marijuana sales in a manner similar to alcohol was introduced this month in the U.S. House of Representatives. While such legislation would be a first for the federal government, several states either already are, or soon will be, collecting millions in revenue from marijuana sales.

Among states that have legalized pot, marijuana tax policies vary considerably. Some states, like Oregon and Washington, levy a marijuana sales tax at the consumer level. Others, such as Alaska and Nevada, tax marijuana at the wholesale level.

24/7 Wall St. reviewed tax policy research organization Tax Foundation data to identify the eight states profiting from legalized marijuana.

Nationwide, eight states and the District of Columbia have legalized recreational marijuana use. In most cases, laws in these states now allow adults 21 and older to grow and possess a specified amount of marijuana for private use.

Four of these states — California, Maine, Massachusetts, and Nevada — voted for legalization as recently as last November. Because legalization is in its infancy in these states, recreational marijuana dispensaries will not open for at least several months. These buffer periods are intended to allow legislators enough time to craft laws to properly regulate the new industry.

Other states, like Colorado and Oregon, have already begun regulating and taxing recreational marijuana sales, adding tens of millions of dollars in revenue to state coffers.

While states regulating and taxing marijuana are frequently lumped together, Morgan Scarboro, a policy analyst with the Tax Foundation, explained in an exchange with 24/7 Wall St. that indeed, “there’s quite a difference in how states tax marijuana.”

For example, while Massachusetts will levy a relatively small 3.75% sales tax beginning in mid-2018, Washington state taxes retail marijuana sales at a rate of 37%. “Massachusetts’ low rate may incentivize more people to switch from the black market to the legal market; however, Washington will collect more revenue on every sale,” Scarboro said.

For many, potential tax revenue is a compelling argument for legalization and regulation. For example, California, the most populous state in the country, anticipates that annual marijuana tax revenue will reach $1 billion. Still, in most cases, revenue from pot accounts for a relatively small share of state budgets. According to Scarboro, tax revenue is likely only “persuasive if a state is already considering legalizing marijuana.” Otherwise, “it doesn’t seem likely that any reasonable revenue number will convince [some states] to pass recreational marijuana laws.”

Indeed, residents of states that have already legalized appear to be much more open to pot use, with most reporting higher than average marijuana usage rates, even before the drug was legalized. With the exception of Nevada, all eight states to legalize recreational marijuana have a higher adult usage rate than the comparable 13.4% nationwide annual adult usage rate.

To determine the states making the most from taxing recreational marijuana, 24/7 Wall St. reviewed marijuana tax rates using the latest tax data compiled by tax policy research organization Tax Foundation. Marijuana usage rates are annualized averages from 2014-2015 and come from the Substance Abuse and Mental Health Services Administration. Per capita state tax collections also came from the Tax Foundation.